How Will the Sharing Economy Change the Way Cities Function?

Ride-sharing services and the uncertainty about how or whether to regulate them like taxi cabs illustrate a world where “ownership” is a rapidly changing concept.

Lyft, a ride-sharing company, requires a hot pink mustache on the grille of
each driver’s personal vehicle. Flickr/Alfredo Mendez

If you want to become a taxi driver in Seattle, there’s a host of things you need to do before getting behind the wheel. You’ll have to take a city-mandated English proficiency exam, as well as a written test on your knowledge of local geography, municipal regulations and appropriate driver conduct. You’ll have to get liability insurance, which usually costs around $7,000 a year. You’ll be subject to an annual criminal background check, a review of your driving record and a physical exam. Your meter rates will be set by the government, which also caps the number of taxis and for-hire vehicles allowed in the area. If you’re lucky enough to own your own cab—and most drivers can’t afford to—then you’re subject to yearly vehicle inspections.

If, on the other hand, you want to be a driver for Uber or UberX or Sidecar or Lyft or any other myriad new app-based ride-share services, here’s what local government requires you to do: nothing. Technically, local code says that anyone receiving payment for providing a ride must have a commercial driver’s license, but Seattle officials have so far opted not to enforce those regulations for ride-share companies.

Taxi drivers, not surprisingly, are up in arms. “As it stands, there’s not a level playing field,” says Dawn Gearhart, a union representative for the drivers in Seattle. “There’s one group that’s very tightly constricted and another group that faces no restrictions.” In August, when the city council was scheduled to debate possible changes to its commercial vehicle regulations, dozens of city cab drivers protested by circling city hall, honking and blocking traffic.

For consumers, ride-share services offer a variety of new ways to get from Point A to Point B. If you’re a Lyft user, for example, a smartphone app will ping participating drivers nearby and respond with an estimated time of arrival. Soon a personal vehicle rolls up, identified by a hot pink mustache affixed to the grille. Per company training, the driver greets each passenger with a fist bump and an invitation to sit up front. At the end of the ride, your phone suggests a “donation” amount and asks you to rate the driver. At the same time, the driver rates you. Sidecar follows a similar procedure, although it allows users to plug in their destination as well, since that might attract drivers already intending to head in that direction. Uber often gets mentioned alongside the other two companies because it’s also a competitor of existing taxi and for-hire driving services. But Uber’s premium brand of black Lincoln Town Cars with full-time professional drivers isn’t so much a ride-share business as a traditional for-hire driving service with an app for a switchboard. (Uber does operate a Lyft-like service in some markets, however, called UberX.) All three companies require drivers to have valid driver’s licenses, vehicle registration, safety training and a vehicle inspection. The companies make money by skimming a percentage of fares received by their drivers.

Nearly everywhere these companies have moved in, it’s been a story similar to Seattle’s: Cities don’t know how or whether to regulate the new upstarts, and that uncertainty leads to protests and pushback from operators who say they’ve been following the rules for decades. Los Angeles has issued cease-and-desist orders to Uber, Sidecar and Lyft. Philadelphia went further, impounding a few ride-share vehicles. Officials at the San Francisco International Airport claim to have actually arrested drivers for ride sharing because it didn’t meet airport regulations for cabs or limousines. In mid-August, the taxicab commission in Washington, D.C., adopted strict new sedan regulations tailored to keep Uber and its ride-sharing competitors out of the local market.

It’s not just transportation upstarts that are challenging cities’ status quo. Consider Airbnb, a site that allows people to rent out their empty apartment bedrooms as short-term hotel rooms. A New York administrative judge in May found one Airbnb innkeeper in violation of the city’s occupancy code and a 2010 state law that bans apartment rentals shorter than 29 days. The ruling seemed to outlaw Airbnb in New York, but its actual impact has been unclear.

The informal commercial relationships cropping up with Sidecar or Airbnb will continue to give cities heartburn. Never in history have individuals had so many choices about how to get the services they need—and how to share those services by pooling together with total strangers. In addition to the explosion of options for sharing rides and rooms, the economy of “collaborative consumption” now encompasses everything from renting someone else’s bike (Splinster) or borrowing somebody’s buzz saw (NeighborGoods), to passing around fine art (Artsicle) or boarding your pet in someone else’s home (DogVacay). Apps like TaskRabbit even let people share their time—everything from preparing someone else’s tax returns to helping assemble an IKEA bookcase. And the sharing business is booming. In Europe, Paris-based ride-share service BlaBlaCar is set to outpace Eurostar rail lines in terms of monthly passengers. Fon, a company from Spain that encourages people to share their home wireless Internet connections, has become the largest Wi-Fi network in the world, with more than 12 million hot spots in 100 countries. According to a recent Forbes estimate, revenues for the sharing economy could exceed $3.5 billion this year, an annual growth rate of 25 percent.

For cities, there’s the short-term—and important—question of regulation. How should governments balance entrepreneurial freedom with the need to set baseline health and safety standards? But there’s also a more fundamental question. How will the sharing economy change the way cities function? Proponents say sharing can create jobs, cut greenhouse gases, reduce traffic (along with wear and tear on roads and bridges), fight crime and lessen the impact of natural disasters. In a world in which “ownership” is a rapidly changing concept—and, some argue, a dying one—can cities learn to let people share?

The list of shareable stuff is endless, but most of the focus right now is on transportation. Why? Because that’s where the greatest potential is, say people like Lyft co-founder John Zimmer. Among all the cars on the road on any given day, about 80 percent of the seats are empty, according to Zimmer. “There are idle cars. There are even idle people,” he says. “It’s an information problem. We need to collect all the information about who needs these things and who has these things, and then we’ll have a much more efficient economy. I think that’s what all these services are about.” Transportation as a system is riddled with inefficiencies, Zimmer says, so that’s where the sharing economy is flourishing first.

Some forms of transportation sharing have been around for years. The car-sharing company Zipcar was founded 13 years ago—an epoch in the world of sharing apps. Today it has offices in 24 U.S. cities and cars on 300 college campuses. For a small annual fee, Zipcar members have access to specially marked vehicles, parked throughout a given city, that they can rent by the half-hour. Zipcar and other newer car-sharing companies, such as Car2Go, have largely been embraced by city governments, which see these shared vehicle fleets as a way to reduce roadway and parking congestion. If 10 people can share one car in one parking space, the thinking goes, that’s nine parking spaces the city doesn’t need to worry about. Cities from Baltimore to Los Angeles have turned over public parking spaces to these car-sharing networks.

But the newest crop of ride-share services is proving more vexing for cities. Networks like Zipcar and Car2Go—call them Sharing 1.0—are really more akin to rental car companies. (Indeed, Zipcar was purchased in March by the Avis Budget Group, under which it now operates.) The latest group of app-enabled sharing companies operate under a different model. Drivers, using their own vehicles, are charging other people for rides. And that’s been causing problems.

In Seattle, Uber, Sidecar and Lyft knew when they moved in that their drivers would be in violation of local laws. But they set up shop anyway. “In many ways, that makes sense because often cities have trouble envisioning what they’re regulating,” says Janelle Orsi, executive director of the Sustainable Economies Law Center in Oakland, Calif., which provides legal counsel to sharing-economy businesses. “A lot of change does come when people break laws.” Seattle hasn’t issued a new taxi vehicle license in more than 20 years. Given the latent customer demand and the likely drawn-out process of revamping city rules, why wouldn’t a ride-share company skirt regulations? “I certainly wouldn’t encourage anyone to do this, but it’s probably exactly what you [would] do,” says Seattle City Council President Sally Clark.

Hypothetically, the deterrent to breaking local rules should be financial and legal penalties. But Seattle doesn’t have the manpower to enforce the rules. With 3,200 registered cabs or other for-hire drivers in Seattle and the surrounding King County area, and only three full-time city inspectors, public officials are already struggling to enforce regulations. Adding hundreds of new ride-share drivers makes the task almost impossible.

The logistical challenges in regulating the existing taxi and for-hire industry—not to mention these new app-enabled entrants—might prompt some city officials to throw up their hands and allow for an entirely deregulated market. In fact, Seattle did just that for five years, starting in 1979, as a way to create jobs, lower taxi fares and eliminate the administrative burden of controlling for quality in the taxi industry. Predictably, consumer complaints followed. Residents encountered dirty cars, inconsistent (yet always higher) fare rates, drivers who didn’t know the area and drivers who refused to give short-haul rides. The public outcry convinced local public officials to once again set fare restrictions and limit the number of taxi licenses.

So if deregulation won’t work, and the current system appears inadequate, what’s the sweet spot? At least one government agency is already working on a solution: The California Public Utilities Commission released a proposal in July that could become a model for cities and states across the country. Under the proposal, the commission would create a new category of prearranged for-hire companies called transportation network companies. Each company (not the individual drivers) would need to be licensed by the commission. The company would have to conduct criminal background checks for each driver, establish a driver training program, implement a zero-tolerance policy on drugs and alcohol, and require an insurance policy of $1 million—more stringent than what for-hire limousine companies pay. In the short term, the regulation would only apply to California cities, but other localities will certainly be watching.

According to the companies themselves, the greatest regulator could be word of mouth. Allowing drivers and riders to rate one another enables a self-selecting market, says Lyft’s Zimmer. “When you’re building a platform, think eBay, Airbnb and Lyft. The platforms that succeed have created the safest and best experience for their users.”

Champions of ride sharing say the industry will spark all sorts of great benefits, from lowering greenhouse gas emissions to creating shorter commutes to improving social cohesion. But it’s not really clear that ride sharing actually addresses any of that. If a woman who used to walk to work now hails a ride on Lyft, there’s no real positive effect for the city. And what if the lure of additional fares causes a Sidecar driver to take more trips than he otherwise would have? Ride-share companies are frequently hailed as innovators that offer more consumer choices. But right now you could just as easily characterize them as black market businesses that save money by breaking local laws.

Some cities, though, are warming to the idea of sharing. At the U.S. Conference of Mayors’ annual meeting in Las Vegas this summer, 15 city leaders signed on to a plan to study regulatory hurdles facing the emerging sharing industry. The resolution they signed—“In support of Policies for Shareable Cities”—describes sharing-economy companies as “engines of innovation” that empower citizens.

San Francisco has been one of the more enthusiastic cities about sharing. In July, Mayor Ed Lee declared “Lyft Day,” in honor of the company, which was founded there. Last year, the city formed a Sharing Economy Working Group, the first of its kind in the U.S. and perhaps in the world, to “take a comprehensive look at the economic benefits, innovative companies and emerging policy issues around the growing ‘sharing economy.’” This August, when San Francisco’s Metropolitan Transportation Commission announced that the Bay Bridge would close on Labor Day weekend for repairs, the agency actually recommended Carma, a carpooling app, to help alleviate the added congestion.

While cities debate whether to embrace sharing or fight it, collaborative consumption isn’t going away. Particularly among millennials, the notion of ownership doesn’t seem to have the same cachet it once did. In 2010, adults ages 21 to 34 bought just 27 percent of all new cars sold in America, down from a high of 38 percent in 1985. There’s a similar drop-off when it comes to buying a home: Between 2006 and 2011, homeownership among adults under 35 dropped by 12 percent. Some of that undoubtedly has to do with the Great Recession, but the fact is that people seem to like the notion of pooling resources, and thanks to ubiquitous smartphones, it’s easier to share than ever before.

Widespread sharing has the potential to redefine personal belongings from “mine” to “ours”—your front yard becomes a communal garden, your empty driveway becomes daytime parking for rent. The public policy applications are less obvious, but some unforeseen benefits have already appeared: In the wake of Hurricane Sandy last year, some New Yorkers used Airbnb to offer free accommodations to displaced residents. When Highland Park, Mich., removed 1,000 streetlights to cut utility costs, local residents pooled their money together for a solar-powered streetlight, the first of more than 200 they plan to install. “The crowd-funding piece,” says Orsi, the legal counselor, has the potential to fill gaps in any number of government services and “could almost transform everything.”

But the truth is that it’s impossible to guess what the real impacts of sharing might ultimately be. This year the John S. and James L. Knight Foundation funded a “The Shared City” column on the website NextCity.org to report on the sharing movement and how it’s changing local communities.* Carol Coletta, vice president for community and national initiatives at the foundation, notes that in some ways, the public policy dimensions of the sharing economy are actually quite old. She points to things like neighborhood watch groups—even government itself. “Cities are the original sharing mechanism,” Coletta says. Pooled tax revenues fund everything from subway cars to police departments. “We often think of government as the other, but it’s just the way that you and I get together to get these things done.”

The more commercial aspects of the sharing economy, however, will continue to draw scrutiny from government. If you sell your clothes using a sharing app, should you pay sales-and-use taxes? If your company facilitates the hiring of temporary workers, as TaskRabbit does, should you pay employment taxes? Sharing may well transform communities for the better, Coletta says. But right now, she adds, public policy is still catching up.

*This story has been updated to reflect that "The Shared City" is a column on the website, NextCity.org.